Introduction
In what can be termed an opportune moment for the capital market investors, the Finance Minister Nirmala Sitharaman recently proposed the merging of four laws that govern capital markets as well as Securities. These Acts include the Securities and Exchange Board of India Act, 1992 (“SEBI Act”), the Depositories Act, 1996 (“Depositories Act”), the Securities Contracts (Regulation) Act, 1956 (“SCRA”) and the Government Securities Act, 2007 (“GSA”). These laws have been aimed to be consolidated into a unified securities market Code. However, this is only an announcement and the Government is yet to introduce the draft Code.
This article is divided into three parts viz. analysis of the laws, rationale behind their consolidation and plausible implications of a Unified Securities Code.
- The SEBI Act, 1992: Enacted as an aftermath to security related scams, the SEBI Act sought to provide for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith. A body known as the Securities Exchange Board of India or the SEBI was established under this Act which is the sole regulatory body concerning the Securities Market in India. The body is managed by 9 board members appointed by Union Government of India consisting of 1 (one) Chairman, 2 (two) members from the Union Finance Ministry, 1 (one) member from the Reserve Bank of India and 5 (five) other members, out of whom 3 (three) shall be whole-time members. The Act was last amended by the Finance Act of 2021.
- The Depositories Act, 1996: As the name suggests, the Act exists to define, regulate and lay down criteria for the depositories in the securities of India. Under the Act, the depository is the registered owner to effect the transfer of ownership of securities on behalf of the beneficial owner, who shall be entitled to all the rights, benefits and liabilities of securities held by the depository. The Act also provides that a person aggrieved by the decision of SEBI can only approach the Central Government or the Securities Appellate Government or the Securities Appellate Tribunal and bars the jurisdiction of civil courts. If any person is aggrieved by an order passed by the Securities Appellate Tribunal, then such person can choose to appeal before the Supreme Court within 60 days of the order of the Tribunal.
- Securities Contracts (Regulation) Act, 1956: The legislation was enacted in the backdrop of a large number of malpractices taking place in the market as well as in the working conditions of these stock exchanges. It deals with stock exchanges, contracts in securities, and listing of securities on stock exchanges, and keep a vigil over all the stock exchanges of India and prevents undesirable contracts in securities market through a process of recognition and continued supervision. It lays down the definition of ‘securities’, provides for recognition of stock exchanges as well as the regulation of listing of stock exchanges.
- Government Securities Act, 2007: The purpose of the Act was to make Government securities. including the Relief/Savings Bonds securities, including the Relief/Savings Bonds issued by the Government of India investor- friendly. The Act consolidates and amends the laws relating to Government securities and their management by the RBI and other connected matters.
The Rationale Behind the Consolidation of the Four Laws?
Lawyers and Security analysts have long argued that the present acts have outlived their utility and are not sufficient to deal with changing dynamics. Stakeholders have demanded that an efficient, lean, and modern framework be put in place which is in tune with the current requirements of the society.
It can be said that the idea of consolidating the Securities law is similar to that of the Financial Sector Legislative Reforms Commission, headed by retired Justice B N Srikrishna, which had proposed repealing of various financial Acts to create a uniform Indian Financial code. The purpose of the Code was to regulate the financial market, govern the aims, powers, and interplay between financial agencies, and bring in a much-needed organization and efficiency to the financial regulatory framework.
Implications of a Unified Securities Code
Lawyers argue that the budgetary proposal to introduce a unified securities market code will help eliminate overlapping and outdated laws. This is because it will result in the removal of duplication and also reduce overlap between the Acts, providing clarity to all stakeholders, including market intermediaries and the investor community at large as well as remove possible conflicts in the regulatory framework.
While there are several benefits of introducing a single Code, there are some concerns that still need to be addressed. Associate partners at Economic Law Practice Naresh Thacker and Abhiraj Arora argue that there is no specific provision under the SCRA where any order passed by a clearing corporation can be challenged before the Securities Appellate Tribunal (“SAT”). However, in IL&FS Securities Services Ltd. Vs. NSE Clearing & Ors the SAT held that decisions of clearing corporations are appealable under Section 23L of the SCRA. This is one area where a gap exists, and more clarity is required.
Furthermore, it was highlighted that the Depositories Act, 1996 does not provide for an appeal against decisions of depositories. Hence, the unified code must resolve the concerns apparent in its constituent Acts instead of just consolidating of the abovementioned problems into a single Act.
Corrida Legal is the preferred corporate law firm in Gurgaon (Delhi NCR) and Mumbai. Reach out to us on LinkedIn or contact us at contact@corridalegal.com in case you require any advice or legal assistance. Go to our Capital Markets publication page for similar articles.